Kawasaki On The Bubble
With the Nasdaq
down for the seventh straight week in a row,
probably the last thing you want
to think about is technology stocks. Me too. As battered tech
fans continue to try to make sense of the past
year’s wild ride, it’s always interesting to hear the insights and ruminations
of someone that has been on the front lines of the Internet Revolution (and
subsequent collapse). I was able to attend a technology conference at UCLA
recently and was very pleased to hear venture capital expert Guy Kawasaki talk
about the recent tech bubble. He addressed what worked, what didn’t work, and
what he thinks the future holds for technology.
Having worked as a tech executive at
Apple Computer in its heyday, Guy brings a solid tech and business background to
his current company. Guy is the founder and president of Garage.com,
a website geared toward technology startups and the whole angel investor and
venture capital process. He also conducts seminar-style “boot camps”
for would-be entrepreneurs.
True Believer
Guy is a dynamic technology “true
believer,” so I wasn’t too surprised that he remains optimistic about the
future of tech. In his speech, he addressed the madness that we all saw bubble
up from Silicon Valley, and he offered some words of wisdom about how tech
investors should assess the next round of technology winners that will
eventually rise from the current devastation. While Guy’s focus is more on the
start-up and pre-IPO phase, it was amazing that many of the Internet
multi-billion-dollar high-flyers were loaded with weaknesses that Guy now warns
new companies against.
Let’s face it, a lot of things went
public in the last two years that were nothing more than ideas getting massively
funded, ramped-up, and rolled out into the Nasdaq as fast as the underwriters
could have the IPO prospectus printed. If you were an underwriter, you got 7% of
whatever money the IPO raised, and with everyone grabbing for the next AOL,
things got pretty extreme. The excess created on the upside has no doubt caused
the current shakeout to be excessively painful on the downside. Listening to
Guy’s talking points on what he likes to see in new companies really helped
clarify why so many new tech and Net companies failed. It also offered clues as
to what to look for in the future when the VC and IPO machine starts cranking up
again.
Tides Go Out
Too
In “true believer” form, Guy compared the tech and Net meltdown to a tide going out, meaning that he obviously expects tech to come back again. I thought his choice of the word “tide” over “bubble” was interesting, and it shows how the VC people are always re-positioning for “the new new thing.” Is
this guy a great salesman/entrepreneur or what? Anyway, he went on to say that when
looking at new companies now that the tide has gone out, he thinks there should be much more of a focus on Excel
presentations and less on Powerpoint. Obviously, this means crunching numbers
and avoiding the flimsy “idea” type companies and focusing more on
companies that clearly show on a spreadsheet how they will become profitable.
He also said that having name brand
investors doesn’t always ensure success. In fact, many high-profile VCs now play
down that they even funded a B2B or B2C enterprise, so remember that just
because a big name is behind a tech company, it doesn’t always ensure success.
The same would go for corporate backing. What came to my mind was how Disney
bought Infoseek and then turned it into the hugely unsuccessful Go.com which
just two years later took a billion dollar write off and was discontinued as a
publicly traded entity. A brand-name movie star backing a startup was generally
the biggest disaster of all.
Make, Then
Launch
We all remember hot sectors two years
ago like B2B, opticals, wireless, so it made sense when Guy said to focus on
companies and not sectors. When things were hot every company in a sector would
rise, and that is something to keep in mind because in the long run only one or
two might actually survive. Likewise, many companies went public in order to
ride the bandwagon of a hot sector, and they basically were public before they
were even a company. To prevent this mistaken process, Guy advised that
companies “Make, Then Launch.” In other words, a company is a process
and not an event.
We all recall the dot.com marketing
splash that so many companies used in order to grab market share. Pets.com and
their famous Super Bowl ad with the puppet is an example of this mistaken belief
that a company had to have an atomic bomb of marketing in order to build the
brand. Guy said that a great product, low-cost guerilla marketing, and
evangelism from management will get the word out. Early adopters then spread
word of the product. The main point here is that cash is king for a start up and
a company can’t let itself waste any of their early capital.
Better Is
Better Than Bigger
Guy mentioned that many of the tech
and Net failure happened when companies tried to expand too fast. They simply
never took enough time to prove that their business model could be profitable,
and in the land grab mentality that we saw last year, many small unworkable
ideas were ramped up into giant publicly-traded unworkable ideas. The IPO and
venture funding that poured into many companies often disguised serious problems
in many companies’ business plans. Add to that the fact you had relatively
inexperienced managements in place, and the potential for problems going
unnoticed. Regarding management, Guy said that “dogs need leashes” and
that managements given a big slug of cash can easily waste it. Pets.com, for
example, burned through $60 million in its final quarter of existence.
Cash Is King
Running out of cash is what killed so
many of the tech startups and dot-coms. By burning through cash, these companies
were unable to stay in business long enough to change their business models and
adapt to new challenges. Guy said a business must have a slow enough burn rate
and enough cash to last at least 18 months. While Guy focused on many of the dot-com
failures in his talk, the lessons still apply to any newer technology
companies that are already publicly traded.
While
we will not likely see anything approaching the dot-com craziness anytime soon
or possibly ever again, there will be new tech winners eventually. In fact, Guy
believes that this current tech shakeout forces VCs and underwriters to get back
to the basics. Gone now are the “clever idea” companies and
unsustainable business models. It’s often out of these kinds of blowoffs that
the new Ciscos can emerge. Guy thinks the next opportunities will likely emerge
in medical devices, information technology, software, and semiconductors. He
also thinks it would be healthy to see the next round of entrepreneurs emerge
from engineering departments rather than business schools. In other words,
science over marketing, Excel over Powerpoint, and software and chips over
selling dog food online!